Harvard Case - Singapore Airlines: A Rights Issue during the COVID-19 Crisis
"Singapore Airlines: A Rights Issue during the COVID-19 Crisis" Harvard business case study is written by Emir Hrnjic. It deals with the challenges in the field of Finance. The case study is 11 page(s) long and it was first published on : Mar 28, 2022
At Fern Fort University, we recommend that Singapore Airlines (SIA) proceed with the rights issue, but with a strategic focus on maximizing shareholder value and minimizing dilution. This involves a combination of financial analysis, capital budgeting, and risk assessment to determine the optimal size and terms of the issue.
2. Background
The case study focuses on SIA's predicament in 2020, facing a severe decline in revenue due to the COVID-19 pandemic. The airline is exploring a rights issue as a potential financing solution to bolster its financial position and navigate the crisis. The case study highlights the challenges of financial strategy in a volatile environment, emphasizing the need for risk management and decision making under uncertainty.
The main protagonists are:
- SIA management: They are tasked with navigating the crisis, balancing the need for immediate liquidity with the long-term sustainability of the airline.
- Shareholders: They are concerned about the potential dilution of their holdings and the impact on the airline's future prospects.
- Financial markets: They are assessing the risk and potential return of SIA's proposed rights issue, influencing the success of the offering.
3. Analysis of the Case Study
The case study can be analyzed using a financial framework, considering the following aspects:
- Financial analysis:
- SIA's financial statements reveal a significant decline in revenue and profitability due to the pandemic.
- Ratio analysis highlights the airline's deteriorating financial position, including declining liquidity ratios and increasing leverage.
- Cash flow management is critical, as SIA needs to manage its operating expenses and maintain sufficient liquidity to weather the crisis.
- Capital budgeting:
- The rights issue represents a potential source of equity financing, which can be used to strengthen the airline's capital structure.
- Valuation methods can be used to determine the fair price of the rights issue, balancing the need for funds with minimizing shareholder dilution.
- Cost of capital analysis is essential to understand the financial implications of the rights issue and ensure it remains a viable option.
- Risk assessment:
- The financial crisis caused by the pandemic introduces significant financial risk to SIA.
- Economic forecasting is crucial to assess the potential recovery of the airline industry and the future demand for air travel.
- Risk management strategies, such as hedging, can be employed to mitigate some of the uncertainties associated with the rights issue.
4. Recommendations
SIA should proceed with the rights issue, but with a strategic approach that considers the following:
- Determine the optimal size of the issue: This requires a comprehensive financial analysis to determine the amount of funds needed to cover SIA's immediate liquidity needs and support its long-term recovery plan.
- Set an attractive subscription price: The price should be attractive to existing shareholders while minimizing dilution. This can be achieved through a combination of valuation methods and negotiation strategies.
- Explore alternative financing options: SIA should consider other sources of financing, such as debt financing or private equity, to supplement the rights issue and diversify its funding sources.
- Implement cost-cutting measures: SIA should aggressively pursue cost-cutting measures to improve its profitability and reduce its reliance on external financing. This could involve organizational restructuring, activity-based costing, and operational strategy improvements.
- Develop a clear recovery plan: SIA needs a comprehensive strategy for navigating the post-pandemic environment, including growth strategy, pricing strategy, and marketing initiatives.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The rights issue aligns with SIA's mission of providing high-quality air travel services by ensuring its financial stability and enabling it to invest in future growth.
- External customers and internal clients: The rights issue aims to maintain SIA's operations and ensure continued service to its customers while preserving jobs for its employees.
- Competitors: SIA needs to remain competitive in the airline industry, and the rights issue will help it maintain its market position and compete effectively.
- Attractiveness: The rights issue is attractive from a quantitative perspective, as it provides a source of capital at a relatively low cost, compared to other financing options.
6. Conclusion
SIA's rights issue presents a strategic opportunity to navigate the COVID-19 crisis and emerge stronger. By carefully planning and executing the issue, the airline can secure the necessary funds to ensure its financial stability and position itself for future growth.
7. Discussion
Other alternatives not selected include:
- Debt financing: While attractive for its immediate liquidity, it could increase SIA's debt burden and limit its financial flexibility.
- Mergers and acquisitions: This option could be risky in the current market environment, and may not be feasible due to regulatory hurdles.
- Liquidation: This is a last resort option that would be detrimental to SIA's stakeholders.
Key assumptions of the recommendations include:
- The airline industry will recover in the medium-term.
- SIA's cost-cutting measures will be effective.
- The rights issue will be successful in attracting sufficient investor interest.
8. Next Steps
- Develop a detailed financial analysis: This should include a comprehensive assessment of SIA's financial position, cash flow projections, and potential financing needs.
- Engage with investors: SIA should communicate its strategy and the rationale for the rights issue to its shareholders and potential investors.
- Finalize the terms of the issue: This includes determining the subscription price, the number of shares to be issued, and the timeline for the offering.
- Implement cost-cutting measures: SIA should immediately implement cost-cutting measures to improve its profitability and reduce its reliance on external financing.
- Develop a long-term recovery plan: This should include strategies for navigating the post-pandemic environment and achieving sustainable growth.
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Case Description
In early 2020, Singapore Airlines Limited (Singapore Airlines) faced severe liquidity issues as the global pandemic halted its flights and uncertainty loomed. Erstwhile massive cash reserves were quickly running out, and the airline's executives pondered how to save the company from insolvency. Singapore Airlines' majority shareholder, Temasek Holdings Limited, agreed to subscribe to a massive capital-raising exercise of up to S$15 billion via a proposed rights offer and mandatory convertible bonds (MCBs). Although minority shareholders were not convinced that the rights issue would be a good investment in such uncertain times, they had to decide whether to vote for it and whether to subscribe to the rights issue and MCBs.
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